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Ecofin to approve accounting reform

EU finance ministers are expected to give a cautious welcome next week (8 July) to efforts by the International Accounting Standards Board (IASB) to reform its governance structures, but they will express concern about its reaction to the liquidity crisis.

The finance ministers’ meeting in Brussels coincides with the launch of an international consultation on IASB reform plans, which envisage an expansion of the board from 13 to 16 members and the establishment of a monitoring group aimed at improving oversight.

EU concerns

The reforms are being proposed to satisfy long-standing EU concerns about the decision-making and funding structures of the standard-setting body. The IASB is mainly funded by the ‘big four’ accounting firms: Pricewaterhouse-Coopers, Deloitte, Ernst & Young and KPMG.

Critics have suggested that the board’s apparent inaction in the face of the liquidity crisis was symptomatic of its lack of accountability. Had the board been more accountable, they say, it would have been compelled to adjust its fair-value provisions to cushion the effect of plummeting asset prices, hence preserving market confidence.

The board’s response to the crisis has stoked criticism. According to some observers, its proposals for a new monitoring group lack teeth. The group would comprise seven members, including representatives from the European Commission and the US Securities and Exchange Commission, which would oversee the appointment of board trustees. While the group would have a power of veto over appointments, it would not be allowed to nominate trustees and would have a limited say over standard-setting.

Responsibilities

German centre-right MEP Alexander Radwan, who has drafted a report on IASB reform, said that the reforms do not go far enough. “The chairman of the SEC must have responsibilities if he is to answer to Congress,” he said. Central banks and the public were currently paying for “fair value problems”, he added.

Philippe Danjou, a member of the IASB, rebuffed criticisms of the board’s reaction to the crisis. “People want a quick answer, but we have to balance a need for rapid response with an undertaking for broad stakeholder consultation,” he said. Recommendations from the Financial Stability Forum, an international group of regulators and central banks, were at the “core” of the board’s response to the crisis, he added.

Pablo Portugal, of the Institute of Chartered Accountants in England and Wales, backed the board. “We think fair value helped expose the full implications of the crisis quickly and brought market discipline to the banks,” he said. He warned of the dangers of “bringing in a number of actors and national interests”, stressing the “direct link between independence and quality”.

The board will convene in Washington, DC, for the formal launch of the consultation on 8 July. The outcome of the consultation will be discussed at a meeting in Beijing, China, in October.